Times 2008 and Lehman Brothers, the bankruptcy of Silicon Valley Bank reminded. SVB is a regional bank and the 16th largest bank in the US. It was one of the main lenders to start-up ventures. However, a series of mistakes led the California Department of Financial Protection and Innovation to lock it down.
The reason the bank has gotten to this point is that it surprised the market by announcing a $2.25 billion new share issue to shore up its capital. At the same time, however, its parent company, SVB Financial Group, had sold $21 billion worth of securities – recording a loss of $1.8 billion – to cover its position against its depositors, who proceeded with outflows.
Who is Silicon Valley Bank?
SVB was one of the main lenders to start-ups. But it was also a bank with a big name in Silicon Valley. Until its collapse, it was the only listed company with a direct connection to Silicon Valley and startups.
According to information gleaned from the bank’s website, its clients were half of Venture Capital’s startups. Pinterest, Shopify, CrowdStrike Holdings are just some of the high-profile names of its clients.
As for its assets, they reached 209 billion. Dollars and its deposits amounted to 175.4 billion. Dollars. On the other hand, after what happened this week, nobody knows the value of the bank.
Despite the CEO’s appeals to avoid a bank run and the assurance that after the capital increase they would not risk losing their money, in the end not only were no funds found but many important investors including Peter Till’s Founders Fund and Union Square Ventures “panicked,” instructing portfolio companies to cut exposure and withdraw their cash. For the same reasons no buyout was possible, with the rapid outflow of deposits ultimately leading to the intervention of the federal authorities.
All these developments resulted in the bank being closed on Friday by order of the California Department of Financial Protection and Innovation and with the US Federal Deposit Insurance Corporation – hereinafter FDIC – taking over as administrator, in order to secure the deposits of its customers bank.
The power of the bank
SVB was the 16th largest US bank with assets exceeding 200 billion as of December 31. It is also by far the largest bank failure since the 2008 global financial crisis.
A few days earlier, the head of the bank declared “proud, that we are the best financial partner in the most difficult times”. One day later the bank claimed the title “Bank of the Year” at a London gala. And just last Wednesday it was a well-capitalized financial institution, just looking to raise $2.25 billion from the markets.
The panic before the collapse
On Thursday alone (09/03) customers had tried to take $42bn from the bank which was ¼ of the bank’s total deposits – on Thursday alone. Deposit leakage had reached such a point that by Thursday afternoon the bank had a negative cash balance of almost 1 billion and could not meet the demands of the Fed.
Although the capital raising plans came as a surprise to investors, panic spread all too quickly. The problem started with the venture capital community – the sector that underpinned SVB’s rise and which the bank consistently served.
It was a massive outflow of deposits, sparked by VCs. “This will go down as one of the most characteristic cases of an industry cutting off its nose and ruining its face.
“Regulators were calling the bank solvent on Wednesday. A day later it was on the brink and by Friday it was officially bankrupt.
How the markets reacted
Understandably, the collapse of this bank managed to trigger a large wave of liquidations in the technology sector that swept bank stocks, not only in the US, but around the world.
The pan-European Stoxx 600 index posted its worst day since last July, while the Greek stock market fell 2.49% with losses in the banking sector exceeding 5%.
Of course, these developments are justified by the sudden closure of a second bank, Silvergate Capital, which was friendly to cryptocurrencies. The bank announced on Wednesday that it is liquidating assets and shrinking operations, with the aim of repaying all deposits.
How the bank got to this point
SVB is a bank for startups. He opened accounts for them, often before the bigger lenders bothered. It also lent to them, something other banks are reluctant to do because few startups have assets for collateral. As Silicon Valley has blossomed over the past five years, so has SVB. Her customers were flush with cash. They needed more to save money than to borrow.
Thus, svb’s deposits more than quadrupled – from $44 billion at the end of 2017 to $189 billion at the end of 2021 – while its loan portfolio only increased from $23 billion to $66 billion.
Since banks make money on the spread between the rate they pay on deposits (often nothing) and the rate borrowers pay, having a much larger deposit base than the loan portfolio is a problem. SVB needed to acquire other interest-bearing assets. By the end of 2021, the bank had invested $128 billion, mostly in mortgage bonds.
How the problem was caused
Then things changed. Interest rates soared as inflation reached very high levels. This greatly reduced the premium on venture capital and caused bond prices to plummet, leaving svb uniquely exposed.
Since the bank made investments during this period, it bought bonds at their maximum price. As the venture capital raising ended, svb clients drained their deposits: down from $189 billion at the end of 2021 to $173 billion at the end of 2022.
SVB was forced to sell its entire portfolio of liquid bonds at prices below what they were paid for. The losses he took from those sales, about $1.8 billion, left a hole he tried to fill with a capital raise. When it went under, the bank held about $91 billion in investments, valued at cost at the end of last year.
A wider banking crisis possible?
Were SVB’s problems an anomaly? The bank seems to have been uniquely susceptible. Federal insurance, created after the collapse of the US economy in the 1930s, covers deposits up to $250,000. This protects all the cash that most people will have deposited in a bank account.
But it is unlikely to cover the funds a company would hold. svb is a bank not just for companies, but a narrow subsection of those that have fallen on harder times than most. About 93% of its deposits were uninsured. Its customers, unlike those of most banks, had a real incentive to run — and they did.
That said, almost all banks face unrealized losses on their bond portfolios. If SVB is the bank most likely to be put in the position of having to supply the bonds at their peak price, it is probably not the only one struggling with the price hit.